We have rich conversations with our clients every day, and increasingly these conversations are happening online. We encourage you to ask questions, share your views, and connect with like-minded professionals.

Details

The challenge of innovation: How companies can stay at the top in the 21st century

Charles Dow, the American journalist who, in the late 19th century, first popularized the stock market index, always chose the most stable and reliable companies to be part of his index. Yet, of the first 100 corporations ever listed in the Dow-Jones index, only one still remains today – General Electric. All others went bankrupt or became a shadow of their former greatness. As a case in point, at the end of 2011, Eastman Kodak company, one of the greatest icons of corporate America which for almost a century controlled the photographic film market, was said be close to bankruptcy after losing 95% of its stock market value and 90% of its employees since 2001. Interestingly, in 2001 another great photography company which controlled the instant imaging market for 50 years – Polaroid Corporation – declared bankruptcy. The explanation for the failure of these corporate icons appears straightforward – they were unable to make the technological transition to digital cameras and digital photography. As Mark Zupan, dean of the University of Rochester’s Simon Graduate School of Business Administration argued: “technological innovation doesn’t stand still.”

Technological innovation

Yet, is this really an issue of lack of technological innovation ability? Ironically, the first digital camera was invented in 1976 in the Kodak R&D laboratories. And Polaroid’s digital camera PDC-2000, launched in 1996, set a new benchmark for image quality in digital cameras. Technological innovation is usually not the problem of corporations like Kodak and Polaroid, which have strong R&D labs. In fact, the invention of the Corporate R&D laboratory in the 1930s allowed large corporations to improve their products, amass a strong portfolio of patents and control their markets for more than 50 years. Unfortunately, technological prowess no longer equates with business success. One of the first academics to understand why this happens was Professor Clayton Christensen from HBS with his work on disruptive innovation. He observed that large companies often fail to spot and capture the new wave of innovation because they are focused on serving their customers well. Customer-centricity leads companies to focus on delivering the incremental innovations demanded by their best clients, while ignoring the new wave of innovation that often starts with non-clients who adopt lower-end solutions.

Historical business models

Being a market leader further hinders innovation because companies are more likely to be tied to their current business models which have historically served them extremely well. For example, although Kodak and Polaroid scientists invented and perfected the digital camera, the companies’ executives did not know to whom they would sell them or how they would make money. There was no film to sell and their business model was based on the Razor and Blade model – selling cheaper products (cameras) and making money on expensive consumables (film). For years, the executives of the two companies fumbled the entry into the digital imaging market, conceding ground to new competitors and eventually leading to the demise of their firms as a viable competitor. Thus, ironically, it is market leadership and customer-centricity that often leads companies to fail by blinding them to new innovations in the market. Professors Chan Kim and Renée Mauborgne from INSEAD proposed that companies, instead of staying in ‘red oceans of competitions’, should try to open ‘blue ocean’ markets by focusing on non-users and re-assessing the value drivers for the industry – the factors that indeed create value for customers, instead of being there because “this is what we are supposed to offer”. Again, the important notion that ‘less’ in a product or service is sometimes ‘more’ because it allows companies to focus on the elements that customers really care about while driving adoption through low-cost and simplicity.

Open innovation

Even as companies started to understand these issues and re-think their innovation strategies, a new shift has happened in the marketplace. In the 21st century, innovation is increasingly happening outside corporations, not inside. This is driven by the widespread availability of knowledge and capabilities in the economy, and by the ubiquitous methods for sharing, integrating, and accessing this knowledge (enabled by the internet and mobile communications). It means that innovation today comes more from users innovating by themselves (for example, in sports equipment), from open-source communities (such as in software development), through crowd-sourcing (for example, through innovation tournaments), or through networks of partnerships, than from internal R&D innovations. Large companies such as LG Electronics, IBM, and GE are re-thinking their innovation strategies to include ‘open innovation’ at the core of their strategy, embracing and learning from their eco-system instead of rejecting it or trying to control it.

Competing in the 21st century

In summary, for any family business leader trying to compete in the 21st century, it is worth asking and acting upon a series of questions about your business:

Are we open to new business models and to new customer segments even if they don´t seem as profitable as our own?

Are we willing to set up dedicated, entrepreneurial teams charged with opening up new markets with innovative offerings, even if these offerings will eventually cannibalize on our core business?

Are we organizing to learn about and leverage the insights and innovations that come from the outside – users, experts, or partners?

Inability or unwillingness to adequately address these issues may lead to business failure. Disruption is bound to happen in your industry. It is a matter of when and how. You can choose to cannibalize your own business through innovation or you can protect your business and wait for someone else to destroy it.

Filipe Santos is Associate Professor of Entrepreneurship at INSEAD. He is the director for the Maag International Centre for Entrepreneurship and the academic director of the INSEAD Social Entrepreneurship Initiative.